According to a letter sent Thursday from the United Kingdom’s Foreign and Commonwealth Office to Leader of Government Business McKeeva Bush, UK leaders were ‘alarmed’ by operating deficits recorded during last year’s Cayman Islands government budget, particularly after the Caymanian government showed a healthy budget surplus the year before.

‘You will have to make some difficult decisions,’ wrote UK Parliamentary Under-Secretary of State Chris Bryant.

The UK has asked Cayman to present both short term plans for raising government revenues as well as a clear strategy for cutting costs and borrowing over the next three to five years. That plan was due to be presented to the foreign office by 7 September.

‘I need to be absolutely convinced that there is a sustainable medium-term plan [before allowing any more borrowing],’ Minister Bryant wrote.

Mr. Bush told an audience of more than 300 people gathered for an emergency meeting at the Ritz-Carlton, Grand Cayman Thursday that Cayman had secured borrowings of some $372 million through local banks to take government through the end of its current fiscal year on 30 June, 2010.

‘All that is required in order to draw down on the funds is the approval of the (Foreign and Commonwealth Office),’ Mr. Bush said.

Getting that approval will likely be easier said than done. Foreign office officials have warned Cayman that it cannot continue to rely so heavily on its offshore tax status and should not expect added borrowing to be approved based on ‘one-off’ expenditure cuts such as the temporary ‘holiday’ for civil servant pension payments.

The UK suggested that Cayman ‘widen its tax base’ by considering options like payroll or property taxes.